The loan prime rate (LPR), which banks normally charge their best customers, is set by 18 designated commercial banks which submit rate proposals to the People’s Bank of China (PBOC).
Twenty-five of 30 participants in the Reuters Snapshot poll predicted a 10 basis point reduction in the LPR one year.
All 30 participants expected a reduction in the five-year interest rate, with 27 of them, or 90%, anticipating a reduction of more than 10 basis points. Among them, 15 traders and analysts predicted a cut of 15 basis points, 10 forecast a cut of 20 basis points and the other two announced a cut of 25 basis points.
Most new and outstanding loans in China are based on the one-year LPR, which is now 3.70%, after a reduction in January. The five-year rate, which was last lowered in May, influences the pricing of home mortgages and is currently at 4.45%.
The market consensus on the LPR cut this month comes as the PBOC unexpectedly lowered two key interest rates earlier this week for the second time this year, in an attempt to revive demand for credit in the COVID-hit economy.
“We believe this may translate into greater transmission of the easing to the real economy, via potential LPR cuts next week,” said Peiqian Liu, chief China economist at NatWest, as the LPR is now weakly linked to the rate of the central bank’s medium-term loan facility.
“We expect the 5-year LPR to be cut by 15 basis points (bps) while the 1-year LPR will be cut by 10 bps as banks step up their efforts to support mortgage demand.”
The notable shift in the PBOC’s monetary policy stance came after a series of key indicators, including credit lending data and activity indicators, showed that the economy slowed by unexpected way in July.
The loss of growth momentum has raised the challenge facing policymakers in the face of growing headwinds, including a resurgence of local COVID-19 cases, inflationary pressures and a slowing global economy.
Policy insiders and analysts have told Reuters that the PBOC is ready to take further easing steps, though it faces limited room to maneuver amid concerns over rising inflation and the leak. capital.
“After this small rate cut and the likely subsequent LPR cut, the PBOC’s room to cut rates will be quite limited due to a growing interest rate differential between China and the US states. United States and squeezed profit margins for banks,” said Ting Lu, chief economist for China at Nomura.